Attracting foreign direct investment

Bringing new investments to the Cayman Islands is about more than just offering a tax neutral environment. The Journal spoke with foreign direct investment consultant Douglas van den Berghe, managing director of Investment Consulting Associates, about Cayman’s ability to attract new business activity.  

 

In today’s globalised economy, countries are in competition when it comes to attracting foreign investments. Because so many economic benefits, such as the creation of jobs and improvements to infrastructure, are related to investments coming from abroad, governments tend to offer incentives to investors to ensure that their local market is a cost-effective place to do business. 

Incentives include anything from tax breaks to cash grants for each new job that is created. But they need to be tailored to suit specific industries to be successful and represent value for money. This requires precise knowledge of exactly what you are selling, says foreign direct investment consultant Douglas van den Berghe. “You need to understand your business environment, what makes it unique, what its strengths and weaknesses are and how it compares with other business environments in the region.” 

Based on this analysis the types of target industries or sectors that a place like the Cayman Islands can facilitate can be identified. “If you don’t have a conducive environment for investments, they do not materialise. You can put a lot of money into promotion, but it won’t work,” he says.  

In June, van den Berghe’s firm Investment Consulting Associates, a specialised global FDI advisory firm, led a training session with the Department of Commerce and Investment, which is driving the efforts of bringing investments to the Cayman Islands. 

One of the crucial elements of successful investment attraction is the collaborative effort of all government entities, says van den Berghe, given that typically various administrative permits need to be obtained and land issues have to be resolved. “If it is not a concentrated, joint effort, we have seen in many jurisdictions that investment is doomed to fail.” 

Cayman stands out in the Caribbean region because of its relatively high cost structure but equally high capabilities and skill sets of the population. Political stability and integrity are the main positive factors that set Cayman apart, something that, van den Berghe says, was illustrated in the ability to attract the financial services industry over the past decades. “Financial services don’t come to a jurisdiction that has any kind of uncertainty about policies,” he says. “That is clearly what Cayman has benefitted from and that is going to come back as the economy grows again.” 

The reputational issues surrounding offshore financial centres are not a major factor affecting the attraction of investments in his view. The image issues, he says, will rather diminish particularly if Cayman is able to diversify its economy. However, this diversification can only be successful if the government acknowledges the importance of FDI and the commitment of all stakeholders within the public and private institutions involved in attracting a diversified portfolio of FDI projects with a clear and focused sector strategy. ICA offers two sets of software, a benchmarking tool called locationselector.com, which monitors the changing business environment of countries, based on a large number of parameters, including the ease of doing business, regulations, labour costs, real estate costs and other variables that are important for companies to set up operations. A second software service ICAincentives.com is an incentives deal database which keeps stock of foreign direct investments projects and the incentives that were needed to attract them. ICA’s data shows that incentives are offered worldwide and in many cases are needed to bring in new investment.  

Given that Cayman is not able to offer tax breaks and the fiscal situation does not allow for subsidies, the opportunities for investment incentives are somewhat limited. So what can Cayman’s government do? 

Van den Berghe says while a tax neutral environment is a positive, there are many more soft factors related to doing business than just the incentives schemes and tax effects.  

“If you have a cost centre operation, like a call centre for example, they don’t make any profit so for them corporate income tax is not an issue. For them it is a nice to have, but it would be much more appealing to receive a job creation grant if they are employing 40 to 80 jobs because that covers the initial investment costs,” he says.  

Equally the sale of software licenses from Cayman to North America may not be subject to tax in Cayman, but could face a withholding tax in the US. This tax in turn cannot be reduced under double taxation agreements because Cayman does not have any. The examples show that Cayman cannot rely solely on perceived tax advantages when attracting investments. 

While tourism is an important part of Cayman’s economy, van den Berghe believes that the new types of business services such as those promoted by Cayman Enterprise City have the most potential for new investment. “I think it is very promising. I was very intrigued by the fact that there is a replication of a special economic zone in the Western Hemisphere that resembles very much the Dubai Media and Internet City.”  

Cayman will be mainly attractive to high end business services and higher value added activities. But at the same time the Islands should further diversify, he advises, for example with medical tourism and the Narayana Cayman University Medical Centre slated to break ground in August.  

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